For decades, the practice of motor carriers arranging for freight to be transported by independent owner-operators—i.e., independent contractors who drive their own trucks—has been ubiquitous. However, this practice is now under threat in California because of a recent court decision.

On April 28, 2021, in California Trucking Ass’n v. Bonta, No. 20-55106 (9th Cir. 2021) (“CTA v. Bonta”), the United States Court of Appeals for the Ninth Circuit addressed whether the broad preemption language of the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) precludes enforcement of California’s Assembly Bill 5 (“AB-5”) against motor carriers operating in California. (AB-5 is discussed here.) In a split 2-to-1 decision that may have enormous (adverse) implications for motor carriers operating in California, the Ninth Circuit held that the California Trucking Association (“CTA”) was unlikely to succeed on the merits of its lawsuit challenging AB-5 because it concluded that the FAAAA does not preempt AB-5.

By way of background, the FAAAA expressly preempts any state “law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier  . . with respect to the transportation of property.”  49 U.S.C. § 14501(c)(1). This broad preemption serves the FAAAA’s “overarching goal”—i.e., to “ensure transportation rates, routes, and services that reflect ‘maximum reliance on competitive market forces,’ thereby stimulating ‘efficiency, innovation, and low prices,’ as well as ‘variety’ and ‘quality.’” Rowe v. N.H. Motor Transp. Ass’n, 552 U.S. 364, 378 (1992). In short, Congress enacted the FAAAA to “prevent States from undermining federal regulation of interstate trucking through a patchwork of state regulations.” Cal. Tow Truck Ass’n v. City & City. of San Francisco, 807 F.3d 1008, 1018 (9th Cir. 2015).

In Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903 (2018), the California Supreme Court adopted the so-called “ABC test” for determining whether a worker is an employee or an independent contractor, which AB-5 subsequently codified.  (The Dynamex decision is discussed here.) Under this test, a worker is presumed to be an employee rather than an independent contractor unless all three of the following requirements are satisfied:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, but under the contract for the performance of the work and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Cal. Lab. Code § 2775(b)(1).

In the CTA v. Bonta case, the district court held that AB-5’s “Prong B” is likely preempted by the FAAAA because AB-5 effectively mandates that motor carriers treat owner-operators as employees, rather than as independent contractors. Cal. Trucking Ass’n v. Becerra, 433 F. Supp. 3d 1154, 1165 (S.D. Cal. 2020). In other words, the district court reasoned that the FAAAA pre-empts AB-5 because under AB-5 “drivers who may own and operate their own rigs will never be considered independent contractors under California law.” Id. It therefore issued a preliminary injunction enjoining California from enforcing AB-5 against any motor carrier doing business in California.

The district court’s reasoning dovetails with other decisional law. In Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d 429, 437 (1st Cir. 2016), the Court of Appeals for the First Circuit found that the FAAAA preempts the “B” prong of Massachusetts’s materially identical ABC test. The Court reasoned that because the ABC test “makes any person who performs a service within the usual course of the enterprise’s business an employee,” it “runs counter to Congress’s purpose to avoid ‘a patchwork of state service-determining laws, rules, and regulations” that the FAAAA was designed to preempt.  Id. at 438 (quoting Rowe, 552 U.S. at 373). Indeed, the Ninth Circuit had previously observed that “an ‘all or nothing’ rule requiring services to be performed by certain types of employee drivers” would “likely” be preempted by the FAAAA. Cal. Trucking Ass’n v. Su, 903 F.3d 953, 964 (9th Cir. 2018).

Nonetheless, the majority in CTA v. Bonta reversed the district court and held that the FAAAA did not preempt AB-5. The majority framed the inquiry as whether AB-5 “significantly related to rates, routes, or services . . . and thus [is] preempted,” or whether it has “only a tenuous, remote, or peripheral connection to rates, routes, or services” and therefore is not preempted. In finding that AB-5 fell within the latter category, the majority reasoned that while AB-5 may compel “a particular result at the level of a motor carrier’s relationship with its workforce”—i.e., the use of employees as opposed to independent contractors—“[i]t does not compel a result in a motor carrier’s relationship with consumers, such as freezing into place a particular price, route or service that a carrier would otherwise not provide.”

The majority’s holding seems to imply that, unless a law explicitly forces a motor carrier to charge a certain price, take a certain route, or perform a certain service, it will fall outside the FAAAA’s broad preemptive scope. The majority’s reasoning is questionable. If this ruling stands, AB-5 may compel California motor carriers to, among other things, reimburse drivers for any cost incurred in operating and maintaining vehicles, track and supervise drivers’ workings hours and meal and rest periods, pay drivers as employees (as opposed to bargained-for rates), and institute and supervise worker-safety programs.  See Cal. Lab. Code §§ 204, 226, 246, 1174(d), 2802(a), 6401.7. Surely this will “compel a result in the motor carrier’s relationship with consumers” in the form of increased costs. Rowe, 552 U.S. at 371 (“pre-emption occurs at least where state laws have a ‘significant impact’—specifically on prices, routes, or services”).

Moreover, as the dissent in CTA v. Bonta pointed out, because AB-5, in effect, mandates the use of employees, “the obvious conclusion is that AB-5 will significantly impact motor carriers’ services by mandating the means by which they are provided.” And, “[w]hether to provide a service directly through employees or indirectly through independent contractors is a significant decision in designing and running a business[.]”

***

If CTA v. Bonta stands, California motor carriers will likely have to restructure their relationships with owner-operators.  However, it is possible that the CTA will ask the full Ninth Circuit court to hear the case, which seems likely as the opinion produced a powerful dissent. Alternatively, CTA may petition the Supreme Court to hear the case, which may decide to grant such a petition because the Ninth Circuit’s opinion appears to conflict with the First Circuit’s opinion in Schwann v. FedEx Ground Package Sys., Inc.

We will track the progress of this case, and provide updates as they come in.

As we previously discussed, in early January 2021, the U.S. Department of Labor issued a Final Rule regarding independent contractor status under the Fair Labor Standards Act.  On May 5, 2021, in line with the policy goals of the new administration, the Department issued a Final Rule withdrawing the January Final Rule.  The withdrawal went into effect on May 6, 2021, upon the publication in the Federal Register (86 FR 24303).  The January independent contractor rule was originally to go into effect in March, before the Department issued a notice of proposed rulemaking proposing to withdraw the rule.  The January rule identified “the nature and degree of control over the work” and “the worker’s opportunity for profit or loss based on imitative and/or investment” as two “core factors” that would have been the most probative to determine whether a worker was an independent contractor.  The rule also identified three additional factors and would have provided that “the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.”

According to the Department’s press release, the withdrawal was intended to help “preserve essential workers’ rights.”  The Department cited as reasons for the withdrawal the independent contractor rule’s “tension” with the FLSA’s text and purpose, as well as judicial precedent, to argue that the rule’s emphasis on two “core factors” “undermined” the more holistic analysis of the employment relationship provided by the economic realities test.  The Department contended that the January rule would lead to workers losing statutory protections.

While it is clear that the Department under Secretary of Labor Martin Walsh rejects the worker classification approach of the previous administration, it remains to be seen how the Department will address this issue in the coming months and years, whether through regulations, subregulatory compliance assistance materials, amicus briefs, or enforcement proceedings.

With the United States in the midst of dealing with the coronavirus pandemic, there has been focused attention on the rollout of vaccines approved for emergency use by the U.S. Food and Drug Administration, and the actual number of individuals being vaccinated. Presently, 250 million COVID-19 vaccine shots have been administered and individuals 16 years of age and older are eligible to receive the vaccine.  Now, in an effort to get more people vaccinated, employers are being encouraged to provide paid time off for employees who have not yet been vaccinated against the virus.

Federal Tax Incentives to Provide Paid Time Off

With the opportunities for employees to schedule or receive vaccinations generally limited to within business hours, employers have experienced an increased number of requests for leave from work in order to obtain a vaccination.  With more than half the adult population in the United States having been vaccinated, but the rate of vaccinations slowing by the day, there is an increasing push for employers to do more.  What is an employer to do?

To encourage employers to provide their employees with paid time off to be vaccinated, the federal government has provided certain employers with a tax incentive.  Specifically, the American Rescue Plan Act of 2021 (ARPA) extends federal tax credits for private employers with less than 500 employees in the United States that voluntarily decide to provide paid sick leave or family leave for each employee receiving the COVID-19 vaccination and for any time needed to recover from the vaccine through September 30, 2021.  For example, if an eligible employer offers employees a paid day off in order to get vaccinated, the employer can receive a tax credit equal to the wages paid to employees for that day (up to certain limits).  For more information about the tax credits, the IRS has published guidance for employers. On the federal level, while employers are not required to provide employees paid leave, there is a tax benefit to doing so.

State and Local COVID-19-Related Paid Sick Leave Laws

While the paid leave requirement under the federal ARPA is voluntary for employers, employers need to be aware of legislative developments at the state and local level that require employers to provide paid leave.  In California, for instance, employers with more than 25 employees are now required to provide up to 80 hours of paid supplemental sick leave (in addition to other available paid leave under state sick leave laws) for employees unable to work or telework for qualifying COVID-19-related reasons.  Those reasons include (i) the employee is subject to a quarantine or isolation period related to COVID-19, has been advised by a healthcare provider to quarantine due to COVID-19, or is experiencing symptoms of COVID-19 and seeking a medical diagnosis; (ii) the employee is caring for a family member who is either subject to a quarantine or isolation period related to COVID-19, has been advised by a healthcare provider to quarantine due to COVID-19, or is caring for a child whose school or place of care is closed or unavailable due to COVID-19 on the premises; and (iii) the employee is attending a vaccine appointment or cannot work or telework due to vaccine-related side effects.

The law is retroactive to sick leave taken beginning January 1, 2021, and prevents employers from requiring employees to use other paid or unpaid leave available before using the COVID-19 supplemental paid sick leave.  The law expires on September 30, 2021.  For additional information, see 2021 COVID-19 Supplemental Paid Sick Leave FAQs.  Note, Massachusetts is proposing a COVID-19-related paid sick leave law.  On a local level, Philadelphia has enacted similar legislation.  See COVID-19 pandemic paid sick leave resources.

Should an employer in California require its employees to receive a COVID-19 vaccination, the California Department of Industrial Relations (DIR), having recently updated its Guide to COVID-19 Related Frequently Asked Questions to include wage and hour issues and vaccinations, has indicated that employers must pay for their employees’ time, including travel time as well as any time employees spends waiting to receive the vaccine.

State and Local COVID-19-Related Paid Vaccination Leave Laws

While California has provided for expansive COVID-19-related leave, New York has enacted more narrowly-tailored legislation requiring all employers to provide a paid leave of absence for a “sufficient period of time,” not to exceed four hours (unless otherwise authorized by the employer), for employees specifically to receive the COVID-19 vaccination.  Employers are required to provide such leave per COVID-19 vaccine injection.  The paid leave is in addition to any other paid leave benefits employees are entitled to, and cannot be charged against such other leave.  Unlike the law in California, the paid benefits are not retroactive and only cover the employee.  The law does not prevent an employer from requiring proof of vaccination.  However, employers should caution employees not to reveal any confidential medical information.  The law expires on December 31, 2021.  For more information, see Paid Leave for COVID-19 Vaccinations.

New York is the only state presently to require employers to provide paid leave for the express purpose of obtaining a COVID-19 vaccination.  However, several municipalities are enacting similar laws.  Chicago, for example, passed an ordinance that prevents employers from requiring its employees to be vaccinated only during non-working hours, whether vaccination is voluntarily sought or employer-required. For those employers requiring employees to be vaccinated, the ordinance requires the employer to compensate the employee at the employee’s regular rate of pay for the time spent to get vaccinated, up to four hours per dose.  Ordinances in several cities in California also require employers to provide up to four hours of paid leave to attend COVID-19 vaccinations.

Many states and municipalities of course have had paid leave laws providing preventive care prior to COVID-19 that can be used for vaccination-related purposes as well as recovery from vaccination side effects.  In fact, to promote health and safety in the workplace, guidance from states, including California, Colorado, Illinois, Massachusetts, Nevada, New Jersey, and Oregon, explicitly confirms employees may use this leave for vaccination-related purposes.  Employers need to be mindful of these state and local requirements.

Non-COVID-19-Related Wage and Hour Considerations

Where there are no leave laws requiring employers to provide paid time off to receive COVID-19 vaccinations, the facts and circumstances in each case will determine whether time spent traveling to and from a vaccination site, or waiting for and receiving a vaccine, will be deemed hours worked for purposes of calculating minimum wage and overtime.  Under the Fair Labor Standards Act, whether time spent by an employee to receive a vaccination must be treated as compensable likely depends on when the vaccination occurs and whether the vaccination is required by the employer.  The U.S. Department of Labor (DOL) has not offered specific guidance on this issue.  However, in the context of an employer requiring COVID-19 testing, similar to requiring receipt of a vaccination, the DOL has indicated that the employer is required to pay employees for time spent waiting for and receiving medical attention at their direction, or on their premises during normal working hours.  See COVID-19 and the Fair Labor Standards Act Questions and Answers.

Myriad legal issues arise, at both the federal and state level, related to an employer implementing a mandatory vaccination policy, which is beyond the scope of this blog piece.  In addition to wage and hour laws, employers need to consider other potential legal issues including but not limited to employment discrimination and retaliation, family and medical leave, privacy, genetic information, workplace health and safety, collective bargaining, and workers’ compensation.  At present, it appears that most employers are choosing to encourage, and not require, employees to obtain their COVID-19 vaccinations.

What Employers Should Do Now

  • Review state and local paid sick leave requirements to determine whether and how they may apply to COVID-19, and be on the lookout for any legislative developments;
  • Consider adopting a written vaccination policy in order to ensure employee awareness and consistent practices;
  • Prohibit retaliation against employees for taking leave for COVID-19-related reasons including receiving the vaccination and provide training to HR personnel and managers to ensure compliance.

For more than 80 years, federal law has provided a general right to premium pay for working overtime hours, originally just for covered employees, then later for employees of covered enterprises.  The laws of more than 30 states contain a comparable requirement, though in some instances differing in the particulars.

This presumptive right to the overtime premium is, of course, subject to the familiar exemption construct whereby individuals whose employment satisfies one or more of the dozens of exempted categories fall outside the premium pay requirement.  Many of the most significant employment law battles over the past three decades have focused on whether certain groups of workers satisfied the criteria for an overtime exemption, resulting in businesses spending billions of dollars on judgments, settlements, and defense costs.  Think pharmaceutical sales representatives, insurance claims adjusters, financial advisors, mortgage loan officers, insurance and bank underwriters, automotive service advisors, various types of drivers, and more.  Hardly a week goes by without reports of seven-figure verdicts or settlements involving challenges to exempt status.

A separate set of disputes has arisen during that same time period regarding whether employers have correctly paid overtime premiums to their salaried non-exempt employees.  There are several different ways to pay overtime to salaried workers, and questions regarding the availability of the fluctuating workweek method have spawned numerous class and collective actions, as well as regulatory and statutory modifications, including a Pennsylvania Supreme Court decision in late 2019 and a federal final rule issued within the past year.

Apart from the lawsuits, employers have devoted countless hours of internal legal, human resources, and executive time—and expended countless millions of dollars on outside counsel fees—weighing the risks posed by classifying workers as exempt or maintaining the salaried non-exempt classification.

Given the risk, the time, and the expense, it’s tempting to ask: Why not just make everybody hourly?  Why do businesses continue to treat some employees as overtime-exempt, or pay non-exempt employees a salary, rather than just pay everyone on an hourly basis?

In our experience helping clients navigate these issues—and we emphasize that these are our own observations and not the result of any formal surveys or other quantitative assessments—the answer seems to be at least three-fold: (1) employee preference for exempt status, (2) employee preference for receiving a salary, and (3) the business advantage of predictable labor costs.

  1. On balance, employees seem to prefer being exempt if given the choice.

In most organizations, exempt status tends to correlate with positions with higher pay, more generous benefits, and greater prestige than non-exempt roles.  People who have the option of moving from a non-exempt position to an exempt role ordinarily choose to take the exempt position—and make that choice with no hesitation.

This is so because, in addition to higher pay, exempt positions often offer access to further training and development opportunities, which in turn make further promotion and career progression possible.  Employers are more willing to provide these opportunities when doing so does not involve an hourly expense.

Another aspect of exempt status that many workers value quite highly is the freedom from punching a clock or otherwise having one’s working time scrutinized on a minute-by-minute basis.  Being accountable for one’s overall job performance, without having to worry about clocking in too early or too late, or taking a mandatory rest period, or eating a meal at the required time and for the required duration, makes people feel respected and valued.

Hourly pay reinforces two unfortunate perceptions in the workplace.  First, it serves as a reminder that one’s work is, at least to a certain extent, fungible with the work of others, and that a worker functions as just a cog in the machine.  Second, it functions as a divider between the “workers” who get hourly pay and the “bosses” who do not.  These perceptions can be especially corrosive with respect to individuals performing the types of work that at least arguably fall within the scope of the overtime exemptions built into federal and state law.

We certainly do not mean to suggest that employee choice trumps legal requirements.  Where the law dictates that an employee is overtime-eligible, compliance is not optional.  But where exempt classification is a plausible option, far more often than not the worker will prefer to be treated as exempt.  At least until the employee encounters trouble, retains a lawyer, and decides to seek additional money for work already performed.

The reality is that nobody ever has to take an exempt job.  There are a lot fewer exempt positions than non-exempt positions in our economy, and it is usually much easier for a worker to qualify for and to obtain a non-exempt role than an exempt one.  Yet workers continue to seek out exempt jobs.  Worker preference for exempt status is an important consideration for employers in hiring and retaining talent, and it is a big part of why exempt status remains a popular choice for employers notwithstanding the potential legal headaches.

  1. Employees ordinarily prefer receiving a salary rather than hourly pay.

As a general matter, hourly workers receive pay for only the specific amount of time that they work, while salaried employees receive the same fixed amount of pay regardless of fluctuations in their hours.  Salaried non-exempt workers also receive additional pay if their hours cross an overtime threshold.

For workers, this difference between hourly pay and salary relates to overall economic security.  Most salaried workers seem to take comfort in knowing what their cash flow will be from month to month.  This consistent pay stream allows salaried workers to engage in more effective budgeting and retirement planning.

Hourly workers, by contrast, are subject to fluctuations in workload from week to week.  This can mean room for significant financial upside if work gets particularly busy, but it can also mean lighter paychecks for slow weeks.  The potential for pay to fluctuate downward puts hourly workers at greater risk of facing a temporary inability to pay current bills.

Of course, salaried workers also face the risk of job loss, furloughs, pay cuts, and the like in the even that their employer faces hard times.  But because of the rules governing salaried employment, employers are ordinarily quicker to reduce working hours for hourly employees than to take steps that reduce pay for salaried individuals.  If anything, during hard times employers that find themselves having to cut hours for hourly employees may nevertheless look for ways to assign some of the work those people would have performed to the salaried staff.

Particularly for risk-averse employees, the knowledge that there will be a constant, knowable stream of income each month eliminates a source of stress and worry.  Payment on a salary basis provides a measure of economic security lacking in hourly pay, and it operates as a kind of buffer protecting workers from suffering economic hardship in the face of short-term workload reductions.  The peace of mind that a salary provides to employees increases employee demand for salary pay, which in turn exerts pressure on employers to pay employees a salary when possible.

  1. Exempt status and, to a lesser extent, salaried non-exempt status help employers plan better for labor costs.

Budgets are, of course, important not only for workers but for businesses.  Anticipating and planning for labor costs can be among the most important activities a business undertakes.  In particular, failing to budget sufficient funds for payroll can put a company into a severe financial crisis, just as failing to pay a worker’s earned wages can create serious hardship for the worker.

With salaried employees, a business knows in advance what it will have to spend on those employees over the course of a month, a quarter, or a year.  There may be opportunities to provide raises, bonuses, or other incentives if the employee or the company perform particularly well.  But the salary ordinarily defines the minimum financial commitment that the business will have to the employee, and this enables the employer to plan for that expense.

Pay for hourly employees can vary considerably, particularly if workloads change significantly throughout the year.  In theory, this type of challenge should work itself out in the long run, as a period of high workload typically results in higher revenue, at least at some point down the road.  But there is often a significant lag between when an employer experiences a spike in demand for hourly labor and when the business receives dollars in the door relating to that specific labor.  This can cause cash shortages for the business that, depending on the financial well-being of the employer, can strain resources, choke off other business opportunities, or even result in insolvency, including job losses for the workers.

Being able to set and to adhere to a labor budget, whether at the level of an individual manager or department or for an entire division or enterprise, is critical for many businesses.  Having workers on salary, especially when those workers are exempt, provides the sort of cost stability that businesses typically seek.

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Critics of exempt status normally paint a picture of a greedy employer trying to cheat its employees by demanding more work without more pay, caricaturing exempt roles as a scam for businesses to bully workers into laboring for free rather than earning overtime pay for their hard work.  But that criticism misses the mark as it fails to explain why exempt roles remain in such high demand, even as non-exempt positions remain available and unfilled.  If exempt status were such a bad deal for employees, why would so many of them choose exempt roles?  Ultimately, the benefits to workers and employers alike will continue to make exempt status an attractive classification.

The same is true for salaried non-exempt work.  The employees who hold these roles are, in our experience, normally office workers, many of whom have a college degree, who may just miss the cut for exempt status.  These individuals value the safety net that a salary provides, as well as the status associated with being salaried rather than hourly.

In the end, not everybody wants the work experience to feel like a factory assembly line.  Those workers who want to be hourly, and who desire overtime eligibility, will have ample opportunity to obtain that type of employment.  But for the rest of us, exempt status and payment on a salary basis are here to stay.

Years ago, Epstein Becker Green (“EBG”) created its free wage-hour app to put federal, state, and local wage-laws at employers’ fingertips.

The app provides important information about overtime exemptions, minimum wages, overtime, meal periods, rest periods, on-call time, travel time, and tips.

As the laws have changed, so, too, has EBG’s free wage-hour app, which is updated to reflect new developments.

No fewer than 46 states (or the localities within them) had changes to their overtime, minimum wage, or child labor laws effective January 1, 2021 – and EBG’s free wage-hour app includes those changes.

EBG’s free wage-hour app also includes 2021 changes to sick leave and vacation laws.

As always, downloading the app could not be easier. It is available without charge for iPhoneiPad, and Android devices.

I had planned to focus this month’s installment of “Time Is Money” on the practice of rounding timeclock entries, addressing the history behind the practice as well as factors that make rounding today a riskier proposition than it used to be.  Then, while reviewing our previous writings on the subject, I came across my colleague Mike Kun’s treatment of the topic in our July 2019 installment, where he already said pretty much everything I had to say.

Back at the drawing board, it occurred to me that rounding is part of a broader challenge that businesses face: how best to record employee working time.  Nearly every large case we handle involving non-exempt employees includes allegations that the employer hasn’t compensated workers fully for their time. Sometimes the claim is unfair rounding, other times exclusion of potentially compensable pre-shift or post-shift activity, and recently we see more employers concerned about recordkeeping in the context of remote work.

These concerns all have a common thread:  there is no risk-free way to record employee working time.  Every timekeeping system yet invented has pros and cons, with varying opportunities for cost savings or budget-breaking overruns, employee evasion, manipulation by wayward supervisors and managers, and exposure to claims in litigation that are increasingly likely to wind up as certified class or collective actions.

As with many aspects of employment law compliance, options that tend to reduce the risk of litigation also tend to cost more.  In timekeeping, that means potentially overpaying employees for their work.  And while overpaying employees can be expensive, paying lawyers—including plaintiffs’ lawyers—to address these issues in litigation can often be even more expensive.

So what’s a well-meaning, compliance-minded employer to do? Are the only choices overpaying your employees, which in many industries can put a company out of business rather quickly, or blindly trusting your employees and your supervisory staff to handle timekeeping properly, which can put an employer on a fast track to litigation?

While there are no perfect solutions, some practices have emerged that many employers see as striking an appropriate balance between cost and litigation risk:

  1. Consider eliminating rounding.

Our 2019 post covered this topic well, and we won’t restate it all here. But increasingly, employers are moving away from rounding in order to save themselves the inconvenience and expense of litigation it tends to invite.

  1. Give more thought to the number and placement of timeclocks.

Many employers with physically large workspaces, such as factories, casinos, and hotels, have employees clock in at a central location before walking several minutes to their work area.  These employees then finish their shifts and walk several minutes to clock out for the day. Several minutes a day, every day, for hundreds or thousands of workers quickly adds up to a lot of money in wages for unproductive and potentially noncompensable time.

What if the employees had the ability to clock in much closer to their work area?  Depending on the employer’s timekeeping system, this may require purchasing more time clocks, but the potential savings from not having to pay for unproductive walking time at the start and end of shifts could quickly pay for the additional time clocks.  If employees engage in compensable donning or doffing away from their work area, placing time clocks by their changing areas serve the same goal: paying for all time the law regards as compensable, while not paying for lengthy pre-shift or post-shift walking to and from the time clock.

In work environments like call centers, where the employees are normally unable to perform compensable work away from their workstation and issues arise regarding time spent booting up, logging in, and loading applications, many employers have moved toward having employees clock in and out as they enter or leave the call center floor.  That approach may result in paying employees for an extra two or three minutes on either end of the shift, but it spares employers the common allegation in lawsuits that it took employees five, ten, or even more minutes to get their computer ready at the start of the shift or to close out at the end of the day.

There is no single correct answer that fits all workplaces, but by giving some thought to how many time clocks an employer has and where to place them, there may be opportunities to make time records more accurately reflect the compensable activity the workers perform.

  1. Provide employees an avenue for reporting time worked outside of the normal routine.

Things happen that render employee time records inaccurate or incomplete. Employees forget to clock in or out. Situations arise after hours. Employees may interact with their supervisors before or after shifts. The key to achieving compliance is to be sure that the employees have—and know about—a way to correct errors or to record working time not already reflected in the timekeeping system. These corrections may involve the supervisor in the first instance, or the employee may have the ability to make changes or to include new or additional time entries directly. If your timekeeping system recognizes only those activities that occur between in-punches and out-punches, you may be failing to capture the full scope of your employees’ compensable working time.

  1. Consider requiring creation of an auditable record whenever a supervisor or manager changes an employee’s time entry.

Time shaving by supervisors and managers continues to be a common claim in litigation, often tied to the assertion that these individuals alter their workers’ time records in order to reduce or to eliminate overtime.  One important way to prevent time shaving and reduce the likelihood of such claims is to require the timekeeping system to record the identity of any person who changes a time record, along with a short statement of the reason for each change. In addition, periodic auditing of changes to time records can help identify patterns of abnormal adjustments by certain supervisors or managers.

*  *  *

Devoting some time and attention to these timekeeping issues can go a long way toward reducing the likelihood that you will face litigation down the road.  Once you establish practices that work best for your business, you will want to follow up with periodic training so that your non-exempt employees and their supervisors and managers clearly understand your policies and expectations.  Your compliance will very likely improve, and you will probably save money in the long run.

We have previously discussed on this page how rounding practices can be problematic.  Now, in Donohue v. AMN Services, LLC, the California Supreme Court has provided yet another reason for employers in California to review their time rounding practices, as well as their meal period practices.

As we previously discussed, more than eight years ago in Brinker Restaurant Corp. v. Superior Court, the California Supreme Court clarified many of the general requirements for meal and rest periods under California law.  Relevant to the decision in Donohue, the Court held that employees must be provided an opportunity to take an off-duty meal period of at least 30 minutes, and that they should be provided that opportunity within the first five hours of commencing work.  (A more detailed discussion of meal period (and rest period) requirements is here.)

The History of Donohue

In Donohue, the employer had previously used an electronic timekeeping system called “Team Time” that rounded punches to the nearest 10-minute increment:  “For example, if an employee clocked out for lunch at 11:02 a.m. and clocked in after lunch at 11:25 a.m., Team Time would have recorded the time punches as 11:00 a.m. and 11:30 a.m.  Although the actual meal period was 23 minutes, Team Time would have recorded the meal period as 30 minutes.  Similarly, if an employee clocked in for work at 6:59 a.m. and clocked out for lunch at 12:04 p.m., Team Time would have rounded the time punches to 7:00 a.m. and 12:00 p.m.  In that case, the actual meal period started after five hours and five minutes of work, but Team Time would have recorded the meal period as starting after exactly five hours of work.”  The employer “relied on the rounded time punches generated by Team Time to determine whether a meal period was short [i.e., less than 30 minutes] or delayed [i.e., not provided within the first five hours].”

Donohue filed suit against AMN Services, LLC in 2014 and the trial court certified a class of non-exempt employees in 2015 based on the plaintiff’s theory that rounding meal period times was unlawful because it resulted short or late meal periods for which no premium was paid.  The employer thereafter moved for summary judgment and the trial court granted that motion, finding that there “was insufficient evidence that AMN had a policy or practice of denying employees compliant meal periods,” and that AMN’s meal period policy complied with California law, and its practice of rounding the time punches for meal periods was proper.”

Donohue appealed and the Court of Appeal affirmed the trial court’s ruling, generally agreeing with the trial court’s reasoning.  Donohue then petitioned the California Supreme Court for review, which was granted to “address two questions of law relating to the meal period claim: whether an employer may properly round time punches for meal periods, and whether time records showing noncompliant meal periods raise a rebuttable presumption of meal period violations.”

Answering that first question, the Court held that “employers cannot engage in the practice of rounding time punches – that is, adjusting the hours that an employee has actually worked to the nearest preset time increment – in the meal period context” because California’s “meal period provisions are designed to prevent even minor infringements on meal period requirements, and rounding is incompatible with that objective.”  Answering the second question, the Court held that “time records showing noncompliant meal periods raise a rebuttable presumption of meal period violations, including at the summary judgment stage.”  Both of these conclusions are significant.

What Can Employers Do After Donohue?

Employers that round their employees’ punches in the meal period context should immediately review their practices and determine whether, after Donohue, they can lawfully continue those practices.

The Court’s other holding impacts employers beyond those that round meal period times.  In deciding that “time records showing noncompliant meal periods raise a rebuttable presumption of meal period violations, including at the summary judgment stage,” the Court essentially put the burden on employers to make an initial showing that a meal period was lawfully provided when an employee’s time record reflects otherwise.  In terms of providing evidence to meet that initial showing in a lawsuit, that can be difficult where memories fade or supervisors take other employment and are no longer controllable witnesses.  As such, employers can protect themselves by implementing certain measures.  Such measures would include not only having lawful meal and rest period policies and practices in place, but also having signed acknowledgments from employees each pay period (or each week or each day) wherein employees confirm that they received, among other things, an opportunity to take at least a 30-minute meal period within the first five hours of work.

Putting It All Together

Following Donohue, entities doing business in California will want to review their timekeeping systems and may want to consider taking another look at their employees’ time records themselves to determine whether the records reflect short or late meal periods. And they may want to consider whether they even want to continue to maintain time rounding practices.

As featured in #WorkforceWednesdayThis week on our special podcast series, Employers and the New Administration, we look at how the Biden administration’s approach to wage and hour issues will impact employers. Special podcast episodes air every other #WorkforceWednesday.

The Wage and Hour Division of the U.S. Department of Labor (DOL) has already adopted the Biden administration’s commitment to enforcement, its movement against arbitration agreements, and a fresh view on worker classification. What other wage and hour developments can employers expect under President Biden?

This episode features special guest Jon Steingart, a senior reporter for Law360’s new and expanded Law360 Employment Authority, and attorney Paul DeCamp, a past Administrator of the DOL’s Wage and Hour Division. Attorney David Garland leads the conversation.

See below for the video and the extended podcast edition. Visit our site for more news.

Video: YouTubeVimeo.

Extended Podcast: Apple PodcastsGoogle PodcastsOvercastSpotifyStitcher.

A sometimes-overlooked requirement for classifying an employee as exempt from overtime is that, with limited exceptions, the employee must be paid on a “salary basis.” [1] Indeed, when employers fail to pay their exempt employees on a salary basis, they may be subject to lawsuits alleging exempt misclassification. As such, properly paying employees on a salary basis is critical to classifying employees as exempt.

The General Rule

Among other requirements, in order for an employer to classify an employee as exempt from overtime, the employee generally must be paid on a “salary basis.”

This means that the employee must receive at least the same amount of pay each week regardless of the amount or quality of work they perform for a given week. Specifically, subject to limited exceptions, an exempt employee must “regularly receive[] each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” [2]

As we explained here, as of January 1, 2020, that means paying employees at least $684 on a weekly basis for employees classified under the executive, administrative, and/or professional exemptions. (Many states – and some cities – have higher minimum salary levels for exempt employees. For example, the minimum weekly salary for most exempt employees in California is $1,120. In Washington, that minimum can be as much as $958.30.)

Exempt Employees Cannot Be Paid Less if the Quality or Quantity of Work Varies

The overarching principle of paying employees on a salary basis is that, subject to certain exceptions, the guaranteed minimum salary “must not be subject to reduction based on the quality or quantity of the work performed. [3] That means that “an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work,” subject again to a few specific exceptions. [4]

In other words, simply because an exempt employee does not work a full 40-hour workday – but performs any work within that week – that employee’s salary may not be reduced. The employee’s pay also may not be reduced “for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” [5]

An employee’s guaranteed salary may also not be reduced if the employee does not adequately complete a certain assignment, or if the employee is not productive as he or she should have been. Although performance issues can and should be addressed in such a circumstance, the employee’s guaranteed salary may not be reduced that week as a result.

Using Variable Compensation to Supplement the Guaranteed Salary

Effective January 1, 2020, “[u]p to ten percent of the [minimum] salary amount required . . . may be satisfied by the payment of nondiscretionary bonuses, incentives and commissions, that are paid annually or more frequently.” (29 C.F.R. § 541.602(a)(3).) That does not mean that such bonuses, incentives or commissions may be capped. Rather, it “means that the amount an employer may credit against the weekly standard salary level is limited to 10 percent of the required salary amount.” [6]

Paying Compensation beyond the Guaranteed Salary

So long as an exempt employee is paid a minimum guaranteed salary, “an employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement . . . .” [7]

However, when that additional compensation is “computed on an hourly, a daily or a shift basis,” the exemption would be lost if, despite paying a minimum guaranteed weekly salary, “a reasonable relationship” does not exist between the guaranteed amount and the amount actually paid to the employee. [8] [9]  “The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.” [10]  Although there is no precise measure, the U.S. Department of Labor has opined that this test is met if the ratio between an employee’s “usual weekly earnings” and his guaranteed weekly salary is equal to or less than 1.5-to-1, but would not be met if a ratio of 1.5-to-1 would be “materially exceeded.” [11]

Exceptions to Paying on a Salary Basis

Notwithstanding the general rule that exempt employees must receive at least the same amount of pay each week regardless of the amount or quality of work they perform for a given week, there are some exceptions to the salary basis that allow employers to make certain deductions from the guaranteed salary. For a thorough discussion of those permissible deductions, please see our prior post here.

Putting It All Together

Although there are few of them, the requirements for paying exempt employees on a salary basis are critical. Employers should ensure that they are paying their exempt employees in accordance with these requirements. And, of course, they should also ensure that they are complying at all times with state and local laws, which can and do differ.

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[1] 29 C.F.R. § 541.602(a); Cal. Lab. Code § 515(a). The exception to this general rule is that certain employees can be paid on a “fee basis.” 29 C.F.R. § 541.600(a). Given its seldom use, the fee basis is not addressed here. More information about paying on a fee basis can be found at 29 C.F.R. § 541.605.

[2] 29 C.F.R. § 541.602(a).

[3] 29 C.F.R. § 541.602(a)(1).

[4] 29 C.F.R. § 541.602(a).

[5] 29 C.F.R. § 541.602(a)(1).

[6] Wage and Hour Division U.S. Department of Labor Fact Sheet # 17U (2019).

[7] 29 C.F.R. § 541.604(a).

[8] 29 C.F.R. § 541.604(b).

[9] Note that a number of courts have concluded that this “reasonable relationship” test does not apply to employees classified under the “highly compensated” exemption. E.g., Anani v. CVS RX Servs., Inc., 730 F.3d 146, 149 (2d Cir. 2013); Litz v. Saint Consulting Grp., Inc., 772 F.3d 1, 5 (1st Cir. 2014)).

[10] 29 C.F.R. § 541.604(b).

[11] U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter No. FLSA-2018-25, at 2 (Nov. 8, 2018).

In November 2020, California voters approved Proposition 22, removing businesses that operate on-demand rideshare and food delivery platforms from the scope of AB 5, California’s controversial independent contractor law.  But before voters approved Proposition 22, the Attorney General of California filed suit against two such businesses, seeking injunctive relief, restitution, and penalties.

As we wrote about here, in August 2020, a California Superior Court judge issued a preliminary injunction prohibiting those businesses from treating drivers who use their platforms as independent contractors.  The businesses appealed, but the California Court of Appeal affirmed the trial court’s ruling, rejecting the companies’ arguments that they could not be expected to change their business models on such short notice.  The businesses then petitioned the California Supreme Court to review the Court of Appeal’s decision.

Among other things, one of the businesses argued that Proposition 22 destroyed the legal basis for the injunction, and that the injunction therefore should not stand.  However, on February 10, 2021, the California Supreme Court denied the petitions for review, leaving the Court of Appeal’s decision intact.

The California Supreme Court’s decision to deny the petitions for review is a curious one in light of Proposition 22 and likely will not have any impact on the businesses’ operations going forward, as Proposition 22 carved out the businesses from the scope of the very law upon which the injunction was based. Presumably, the businesses will move the trial court to vacate the injunction based on the change in the law.

Ultimately, the California Attorney General’s lawsuit and the decisions in the case should serve as a reminder to businesses to consult with counsel to evaluate the risks associated with classifying workers as independent contractors in California.